Are interest receipts a combined-group parent earns on loans to affiliates outside the combined group excluded from the combined group's business receipts factor?

Plain-English summary

A holding company ("Corporation X") is the parent of a combined group that files an Article 9-A combined franchise tax return and provides financial services. On a separate-company basis, Corporation X makes loans to affiliates — including affiliates that are excluded from the combined group because they are taxed under Article 32 (banks). It finances these loans with public debt, so the interest income is largely offset by interest expense and the margin is thin. It asked whether the interest receipts from the out-of-group affiliates are excluded from the combined group's business receipts factor.

The Department said no — they are included. In a combined report, allocation uses combined accounts from which only the intercorporate receipts between members of the combined group are eliminated (Tax Law § 211.4; 20 NYCRR §§ 4-1.2, 4-4.7). Loans to, and receipts from, affiliates that are not in the combined report are not automatically eliminated. So the activities of Corporation X with parties outside the combined group are considered, and the interest receipts it treats as business income are included in the combined group's business receipts factor.

The Department added the standard caveat: Tax Law § 210.8 lets the Commissioner use a different allocation method when the statutory business allocation percentage does not fairly reflect the taxpayer's New York activity. But whether the percentage here is distortive (given the thin margin on the intercompany lending) is a factual question not resolved in an advisory opinion.

What this means for you

Combined filers with intercompany lending

Eliminations are only for transactions inside the combined group. Interest and other receipts from affiliates that are outside the group — for example Article 32 banks excluded from the Article 9-A combined return — remain in the combined receipts factor and affect your New York allocation.

Groups with low-margin intercompany finance operations

Large gross interest receipts from out-of-group affiliates can inflate the receipts factor even when the net margin is tiny. If that produces a distortive New York allocation, the remedy is the § 210.8 discretionary-adjustment route — but you must make the factual case, typically on audit.

Accountants and tax professionals

Map each counterparty to in-group vs. out-of-group. Eliminate intra-group receipts under §§ 4-1.2 and 4-4.7; leave out-of-group receipts in the factor. If the resulting BAP overstates New York activity, develop the § 210.8 fair-allocation argument with supporting facts.

Common questions

Q: Are intercompany interest receipts always eliminated in a combined report?
A: No. Only receipts between members of the combined group are eliminated. Interest from affiliates outside the combined group stays in the combined receipts factor.

Q: Why were these receipts included?
A: The borrowing affiliates were Article 32 banks excluded from the Article 9-A combined group, so the loans and interest were transactions with parties outside the group and were not eliminated.

Q: Is there any relief if the receipts factor distorts our New York tax?
A: Possibly, under Tax Law § 210.8, which lets the Commissioner adjust an allocation that does not fairly reflect New York activity - but that is a factual determination, not resolved in an advisory opinion.

Citations and references

Statutes, regulations, and authorities:
- Tax Law § 211.4 (combined reports; elimination of intercorporate items)
- 20 NYCRR § 4-1.2; § 4-4.7 (combined business receipts factor; intercorporate elimination)
- Tax Law § 210.8 (discretionary adjustment of a distortive allocation percentage)
- Tax Law § 210.3(a) (business allocation percentage)
- Deloitte Tax LLP, TSB-A-06(2)C (June 27, 2006)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2006.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a06_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-06(2)C
Corporation Tax
June 27, 2006

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C050527B

On May 27, 2005, a Petition for Advisory Opinion was received from Deloitte Tax LLP,
Two World Financial Center, New York, NY 10281-1414. Petitioner, Deloitte Tax LLP,
provided additional information with respect to the Petition on December 22, 2005.
The issue raised by Petitioner is whether interest receipts received by Corporation X from
affiliates outside the combined group, as described below, are excluded from the combined
group’s receipts factor of the business allocation percentage.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Corporation X is a holding company and corporate parent of an affiliated group of
entities. Corporation X and some of its affiliates (referred to collectively as the “Combined
Group”) file a combined franchise tax return under Article 9-A of the Tax Law. The Combined
Group’s normal business activity is providing financial services to a diverse group of customers.
Thousands of employees are engaged in the provision of these services.
Corporation X’s activity, on a separate company basis, includes making loans to its
affiliates. Some of Company X's loans are to affiliates that are excluded from the Combined
Group because they are subject to tax under Article 32 of the Tax Law. Corporation X finances
these related party loans principally through public debt offerings. Only a few individuals are
engaged in administering and servicing the intercompany loans. Corporation X does not make
any loans to unrelated third-parties. It is presumed for purposes of this Opinion that Corporation
X's loans, on a separate company basis, are treated as business capital, and interest income from
these loans is treated as business income.
A significant portion of Corporation X’s receipts, on a separate company basis, comes
from interest income on these intercompany loans. These receipts, however, are substantially
offset by interest payments related to servicing the debt incurred to finance such intercompany
lending. As a result, the aggregate profit margin associated with making such intercompany
loans is insignificant, especially when compared to the aggregate profit margin on the Combined
Group’s normal business activity of providing financial services to third-party customers.
Applicable law and regulations
Section 210.8 of the Tax Law provides:
If it shall appear to the [Commissioner of Taxation and Finance] that any business
or investment allocation percentage or alternative business allocation percentage

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June 27, 2006

determined as hereinabove provided does not properly reflect the activity, business,
income or capital of a taxpayer within the state, the [Commissioner] shall be authorized
in [his] discretion, in the case of a business allocation percentage or alternative business
allocation percentage, to adjust it by (a) excluding one or more of the factors therein, (b)
including one or more other factors, such as expenses, purchases, contract values (minus
subcontract values), (c) excluding one or more assets in computing such allocation
percentage, provided the income therefrom is also excluded in determining entire net
income or minimum taxable income, or (d) any other similar or different method
calculated to effect a fair and proper allocation of the income and capital reasonably
attributable to the state, and in the case of an investment allocation percentage, to adjust it
by excluding one or more assets in computing such percentage provided the income
therefrom is also excluded in determining entire net income or minimum taxable income.
Section 211.4 of the Tax Law provides, in part:
(a) Combined reports permitted or required. In the discretion of the commissioner,
any taxpayer, which owns or controls either directly or indirectly substantially all the
capital stock of one or more other corporations, or substantially all the capital stock of
which is owned or controlled either directly or indirectly by one or more other
corporations or by interests which own or control either directly or indirectly
substantially all the capital stock of one or more other corporations, may be required or
permitted to make a report on a combined basis covering any such other corporations and
setting forth such information as the commissioner may require, subject to the provisions
of paragraphs one through five of this subdivision.
*

*

*

(b) Computation. (1) Tax. In the case of a combined report the tax shall be
measured by the combined entire net income, combined minimum taxable income,
combined pre-nineteen hundred ninety minimum taxable income or combined capital, of
all the corporations included in the report; …
(2) Tax bases. In computing combined entire net income, combined minimum
taxable income or combined pre-nineteen hundred ninety minimum taxable income
intercorporate dividends shall be eliminated, in computing combined business and
investment capital intercorporate stockholdings and intercorporate bills, notes and
accounts receivable and payable and other intercorporate indebtedness shall be eliminated
and in computing combined subsidiary capital intercorporate stockholdings shall be
eliminated, …
Section 4-1.2 of the Regulations provides rules for allocation on combined reports, in
part, as follows:

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In the case of combined reports, allocation is made on the basis of combined
accounts from which intercorporate items (including intercorporate receipts) are
eliminated ….
Section 4-4.7 of the Regulations provides rules for the receipts factor on combined
reports as follows:
The receipts factor on a combined report is computed as though the corporations
included in the report were one corporation. All intercorporate business receipts are
eliminated in computing the combined business receipts factor. Intercorporate receipts
are receipts by any corporation included in the combined report from any other
corporation included in the combined report. As to when combined reports will be
required or permitted, see Subpart 6-2 of this Title.
Opinion
In this case, it is assumed that Corporation X and its affiliates included in the Combined
Group are permitted or required to file a combined report pursuant to section 211.4 of the Tax
Law.
Pursuant to sections 4-1.2 and 4-4.7 of the Regulations, allocation is made on the basis of
combined accounts from which all intercorporate business receipts between the corporations
included in the combined report are eliminated in computing the combined business receipts
factor. However, loans made to and receipts from affiliates which are excluded from the
combined report are not automatically eliminated.
Therefore, where Corporation X and its affiliates file a combined report pursuant to
section 211.4 of the Tax Law, sections 4-1.2 and 4-4.7 of the Regulations provide that the
activities of Corporation X and its affiliates with parties outside the combined group are
considered when computing the combined business receipts factor. Accordingly, the interest
receipts received by Corporation X from affiliates outside the Combined Group and treated by
Corporation X as business income are included in the Combined Group’s business receipts factor
of the business allocation percentage.
It should be noted that section 210.8 of the Tax Law authorizes the Commissioner of
Taxation and Finance to use other methods to more accurately reflect the taxpayer’s business
activity within New York State when it appears to the Commissioner that the business allocation
percentage determined pursuant to section 210.3(a) of the Tax Law does not properly reflect the
activity, business, income or capital of a taxpayer within New York State. If a different method
is used, it must be calculated to effect a fair and proper allocation of the business income and
business capital reasonably attributable to New York State. The determination of whether the
business allocation percentage determined pursuant to section 210.3(a) of the Tax Law results in
a fair allocation of Petitioner’s business capital and business income to New York State is a

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factual matter that is not susceptible of determination within the scope of an advisory opinion.
(Tax Law, §171.Twenty-fourth; 20 NYCRR 2376.1(a).)

DATED: June 27, 2006

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.